Sunday, February 26, 2012

When you think you made a great purchase (Warren Buffett edition)

I consider myself a bit of a Buffettphile - but I did not even know Berkshire had a sizeable agricultural machinery operation. Sure agriculture has been good and because the capital equipment is a lean off that it has been very good. But this throw-away quote from the annual letter is astounding:

Vic Mancinelli again set a record at CTB, our agricultural equipment operation. We purchased CTB in 2002 for $139 million. It has subsequently distributed $180 million to Berkshire, last year earned $124 million pre-tax and has $109 million in cash. Vic has made a number of bolt-on acquisitions over the years, including a meaningful one he signed up after year end.

This business has - in a decade - distributed well over 100 percent of its purchase price in cash to Berkshire and its pre-tax earnings are roughly the acquisition price.

Of the thousands of listed companies in the world how many have been that good in the last decade. Surely not many.

It's been an amazing investment really. Without knowing too much about the business, it's interesting that typically difficult industries such as agriculture can give rise to niche markets that profitably service the industry and in which a good business can be built. It's similar in that way to airlines (and the profitable derivatives such as travel agents, OTAs, GDSs, etc) and most insurers (with brokers).

COMPANY NEWS; BERKSHIRE HATHAWAY IS BUYING CTB FOR $140 MILLIONPublished: August 20, 2002

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Berkshire Hathaway Inc., the investment company headed by the billionaire Warren E. Buffett, agreed to acquire the farm-equipment maker CTB International Corporation for $140 million in cash, plus the assumption of $40 million in debt. Shareholders of CTB, which is based in Milford, Ind., will receive $12.75 a share, *************** 13 percent less than Friday's closing price. ************ CTB's 1,300 workers design and make equipment used to feed and house chickens and hogs, gather eggs and store grain.

******* INSIDERS OWNED 55% OF THE COMPANY AND SOUGHT WARREN OUT TO BUY THE COMPANY. WAS AN ILLIQUID OFF-THE-RUN EQUITY. PRACTICALLY WOULD HAVE BEEN TOUGH TO BUY IT / SOURCE THE IDEA. THAT SAID, WARREN CRUSHED THE OPPORTUNITY. WHEN HE FINDS THEM, HE DOES NOT LET THEM SLIP.

The NYT article shows just how savvy Buffett is. Not only did he get a great deal, he bought it for less than market price! And yet every time Buffett is in the news, there are a bunch of people saying he's clueless. I wish I was that clueless.

WEB is an investing genius, no doubt, but he strayed when he started buying things like COP at the top of the market, EFH, IBM and over 2x what it was going for in 2009 [where I and I'm sure several other investors bought it], and esp selling derivatives.

I suspect the real dumb money are lenders and private equity LPs. For the GPs you have ten years to hit a few "home runs" and not blow up, in the mean time your capital is locked up and your fees are handsome. Relationship bank lending to PE deals makes so little sense it's farsical, but lending originators have always preferred fees (how they get paid) to preserving capital (credit's problem).

He paid $180 million ($140 cash + $40 debt) for a business generating ~$20 million pretax income per year for the past five years and which completed a large number of acquisitions in the past 3-years.

Long-term management team in place, disciplined capital management during that span (little debt), enormous growth potential through a newly formed international division, clearly stated reason to exist and competitive advantages (feed represents 60-70% of cost of raising animals; they design, manufacture and sell systems that maximize efficiency of feeding).

It really looks like a fantastic business. Kudos to Buffett for attracting that kind of company to Berkshire.

In my opinion, the answer lies in you last sentence. The minute the company was acquired by BH, it no longer behaved as a listed company. I don't believe the management of any BH companies make the compensation public companies in the US make today. Many public companies are looted by management and the board and shareholders don't care.

As a sector small caps are overvalued, no question. But if you are running long short, and are trying to operate in the less efficient parts of the market, you are going to naturally be in the small caps on both sides. More illiquid off the beaten path longs, still are very cheap (perhaps some are traps) compared to the shorts which are slightly bigger and massively overvalued. If you put these 2 groups together small caps are "not attractive" but we are talking thousands of stocks. It's a silly point. Just because there are a bunch of recent 1 billion ipos that are crazy overvalued, and junky garbage doesnt mean there arent quality small caps to buy (if you are hedging....).

You just can't generalize small cap land. And its a lot different today than when I was loading up in October....

Total EV of CTB was 180 mn,which comes around to 12x net profit, but that business was a great business it was previously owned by PE firm and when they wanted to exit aand the management want to grow they became public but due the lack of trading and pressures they went private. If you dig deeper Management still owns a small part of the business.Previous private equity owners made about 40% Annual return based on their purchase & sale prices. Though that PE is a family office.

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